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Editorial Notes

[Editorial Notes] Will strategic disinvestment help the economy?

The move to privatize some of these big state-run firms is being seen as a bold step by the government at a time when the economy is experiencing a severe downturn and revenue collection targets are under stress.
By IASToppers
November 28, 2019

Contents

  • Why it was in News?
  • Why do governments divest stake in public sector undertakings?
  • What is a strategic sale?
  • History of disinvestment in India
  • What does the government get out of divestment?
  • Conclusion

Will strategic disinvestment help the economy?

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Why it was in News?

public sector undertakings (PSUs)

  • Recently, the government announced that it would sell stakes in several public sector undertakings (PSUs) and give up management control in some.
  • The Central government will give up full management control to buyers in Bharat Petroleum Corporation Ltd., Shipping Corporation of India and Container Corporation of India Ltd (CONCOR).
  • The government will transfer its stake (74%) in THDC India Limited (formerly Tehri Hydro Development Corporation of India) and its 100% stake in North Eastern Electric Power Corporation Limited (NEEPCO) to National Thermal Power Corporation (NTPC) Ltd.

Why do governments divest stake in public sector undertakings?

public-sector-undertakings-(PSUs)

  • As per some political parties, the core competence of a government does not lie in handling PSUs to make profits. For this reason, divestment is also a priority in the election manifesto of such parties.
  • Given the fact that the government is spending higher amounts on infrastructure to boost economic growth, additional income from the proceeds of a stake sale is significant in this regard.

What is a strategic sale?

In the strategic sale of a company, the transaction has two elements:

  • Transfer of a block of shares (such that government hold less than 51% share) to a Strategic Partner (Once the Governments shareholding goes below 51%, it ceases to be a Government company)
  • Transfer of management control to the Strategic Partner

A strategic sale is also different from cases where the government transfers majority stake but only to another PSU over which it has control.

History of disinvestment in India

disinvestment in India

  • Since liberalization began in India in 1991 under then Prime Minister P.V. Narasimha Rao, India saw a steady flow of disinvestment decisions.
  • However, privatization, where buyers took over management control, began later under the National Democratic Alliance governments.
  • Arun Shourie, India’s first Disinvestment Minister, gave an impetus to the exercise. He is credited with the privatization of Maruti, Bharat Aluminium Company Ltd., Videsh Sanchar Nigam Limited and Hindustan Zinc through the strategic sale process.

What does the government get out of divestment?

The amount that government will get from a stake sale in the five abovementioned units (INR 80,000 crores) will be useful in following condition:

Provide cash for expenditure in infrastructure and the social sector

  • India is currently facing an economic slowdown in which indirect tax collections are below par. The government has cut corporate tax rates hoping that companies will use these savings for price cuts or for investments that create jobs. It has also lowered personal income tax rates.
  • As a result, government have less cash for its own expenditure in infrastructure and the social sector. Hence, the above amount (80,000 crores) can be used by government in infrastructure and the social sector development.

Meeting fiscal deficit target

  • If the fiscal deficit of India increases beyond limit, it can lower the India’s investment rating given by the global rating agencies. This would make any future foreign currency loans costlier, both for India and for large Indian conglomerates.

Conclusion

The move to privatize some PSUs firms reinforces the reform credentials of the current government. A successful disinvestment may boost the government’s hopes of riding out the worst economic storm in recent memory. However, the proceeds gained from such disinvestment must be carefully translated to the real economic growth. 

 

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